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A Relative Case for Commodity Funds

Investors have plenty to worry about in merely allocating capital. Now it
seems that even unallocated capital (cash positions) is at risk. As we've all
read recently, several disconcerting events have unfolded throughout the
derivatives industry.

Given that so many people have a pessimistic outlook on the global state of
economic affairs, many folks have flocked to commodity investments over the past
few years. Those who have used commodity exchange-traded funds and mutual funds
may have been disappointed with their recent performance, but at least that was
only a consequence of market performance. Many others that have gained access to
these asset classes through specialized brokerage firms have had much more to
fret about.

MF GlobalBack in 2011, MF Global, the brokerage giant
run by former New Jersey Governor and Goldman Sachs CEO Jon Corzine was faced
with a large liquidity crisis. Historically, institutions like MF would borrow
funds on an unsecured basis. Recent times, however, have seen these firms'
counterparties implement collateral requirements.

As an enormous repo-trade moved into the red, MF found itself in hot water.
Assuming that none of the bonds involved in the trade defaulted, the repo trade
was relatively low-risk. So long as MF could maintain the positions until
maturity, they would net out in the black. As circumstances in Europe continued
to look bleak, however, additional collateral was required to prevent the firm's
counterparty from pulling the loan. The trade was so large that coming up with
additional collateral was no small task.

MF Global provided services for a large number of market participants. Among
them were traders, hedgers, market makers and everyday investors. In their
desperation, MF Global breached Customer Segregated Fund regulations. To mask
its lack of liquidity, the firm transferred significant sums from its 51,000
customer segregated accounts. Effectively MF Global abused its position as a
trusted custodian and converted private funds for its own proprietary trading.
The final accounting of missing customer funds tallied up to $1.6 billion, much
of which is still missing.

In the best possible scenario, MF Global's trade would have been seen through
to maturity, and the stolen funds would have been returned. As it turned out,
the scenario was far from optimal, and MF Global customers are likely never to
be fully recompensed.

Peregrine Financial Group Inc.More recently, the futures
brokerage firm PFG was found to have committed similar trespasses. The CEO of
PFG, Russell Wasendorf Sr., is accused of having misappropriated significant
sums of customer money, nearly $200 million in total.

The NFA alleges that, after breaching Customer Segregated Funds regulations,
the firm and its CEO falsified financial statements to cover it up. When the NFA
found out, Wasendorf attempted to take his own life.